Iraq has moved closer to banning the use of US dollars in the country following the Council of Ministers’ economic affairs committee’s decision to prohibit all state institutions from dealing in the US currency.

Iraq is also trying, although with some difficulty, to transfer its UN-monitored escrow petroleum account from US dollars to euros and to halt all foreign trade transactions in US dollars. However, the decision has raised important questions about the underlying rationale for the move.

According to the Iraqi daily al-Thawra on 5 October, the government decided to replace the US dollar with the euro and other convertible European currencies in an effort to minimize the influence the US has on the country's international economic and financial transactions, which are significantly curbed by the US-backed UN sanctions. The ban includes all agreements and trade contracts concluded with foreign parties.

Sabri Kati, undersecretary at the Ministry of Transport and Communications, said on 5 October that the ministry had begun using alternative currencies to the dollar in the contracts it signs with foreign trading partners. Iraq has also started to inform its trading partners that it will no longer deal in US dollars and is asking them to price their goods in other currencies.

The Central Bank of Iraq has announced that it plans to buy European currencies including the French franc, the German mark, the Austrian schilling, the Dutch florin and the Italian lira against their equivalent in US dollars.

However, the Iraqi decision and its consequences depend on how the country manages the conversion. “It depends what they use the currency for,” one Iraqi economist told MEES. “They must study the currency in term of imports and goods and services in terms of origin of product.

It is important to know if Iraq needs the currency to invest internationally as well as to know where to invest. And of course, if you want to accumulate your reserves using the euro, you have to think about the returns on these reserves. The central bank will have to study gains and interest rates.”

In addition, Iraq must weigh up the transaction costs and the exchange exposure risk that will occur when it moves from US dollars to euros. “Iraq could experience large losses from transaction costs,” said the economist. “This is a good time to use the dollar since the euro is weak and purchasing power vis-a-vis the European currencies is high.”

Iraq will also be forced to consider the structure of its external trade, with a focus on external claims. And at the moment it is unclear how this would affect the Iraqi dinar.

“Do they want to peg the dinar or link it to the currency, or do they just want payments at a particular time?” asked the economist. Domestically, a conversion to the euro would reduce the volume of circulation of the dollar in the economy and its strength in the black market.

Hisham Hasan Tawfiq, chairman of the Iraqi Economists Society, was reported as saying that the switch to other currencies would not affect daily trade dealings in the domestic market and that there would be no negative consequences from such a move.

He said that banking and trade transactions with other countries will use foreign convertible currencies, making it possible to control the offers received by Iraq priced in these convertible currencies.

Dr Muhammad Taqah, dean of the Baghdad School of Economic Science, said the decision to exclude the dollar in trade transactions has strategic dimensions and claimed that the decision will stabilize the local market. - (mees)